A change this week from my weekly look at a particular value share, which will be continued in future.
A general comment on our board mentioned something that got me thinking. The thread was about ethical share investing and its relevance to the value approach. Personally, I do not see any relevance at all, I'll buy anything, but obviously others have different views and may not be willing to buy otherwise attractive, perhaps even full deep value pyad shares, if they do not agree with the company's business. Fair enough, each to his own. But I did not see our board as a place for a debate on individual share ethics, preferring that readers simply make up their own minds about whether or not to go in to a particular share, or to put one up for discussion.
I did not want a situation to develop into the kind of emotional argument sometimes seen on other boards, because value is essentially an unemotional strategy – or so I advocate, anyway. Discussions about the ethical nature of a particular share, because people seem to become worked up about this due to the fact that it is an emotional and wholly subjective subject, would tend to detract from value as an approach. That approach is far and away dictated by a cold, hard look at the numbers: that is, it has high objectivity in its style and only limited subjectivity. But corporate ethics are totally subjective, depending on the mind of the investor.
One well-known fairly large company, for example, often put forward as a value play, makes both guns and bread amongst its diversified interests. Is it ethical? I don't know and I don't want to know.
Anyway in the course of the discussion, someone, possibly a newcomer to the value board, made a comment about the value style and quoted from the Ten Steps and other sacred texts of the Foolish Way. Particular reference was made to the idea of "commitment" and the concept of "owning part of a company", which we advocate.
Our reader said also that he did not think that I had written any of this. Quite correct, of course. If you look at my value strategy it seems completely at odds with the above Foolish advice.
As far as value shares are concerned, the last thing on earth I am interested in is commitment. I think I said to our reader "commit and you are dead". Even worse, I have absolutely no sense of the cosy idea of owning a part of the company. The idea appals me.
But it struck me that some people, perhaps newcomers, may be puzzled by this and our reader is one of them. After all I do write as a member of the team here so a little explanation may be in order.
The first point to bear in mind is that the Ten Steps are aimed at novice investors. Those who are completely new to the idea of share investing in every way. And if you are advising first grade pupils, you don't try and teach them nuclear physics. A general introduction to the most straightforward approach to investing is required.
And the most straightforward approach is long-term buy and hold. That is what the texts are referring to when commenting on commitment and part-ownership. LTB&H is the basic Foolish advice to share investors, and especially newcomers. I believe myself that it is a fine way to invest, provided of course you own good shares, and have seen, personally, people make very serious money out of this over 20-25 year periods. Mind you, they started with fairly serious money in the first place, through inherited blue chip portfolios, but it became even more serious by the wonderful strategy of doing absolutely nothing; primarily through the equally wonderful mechanism of complete and utter disinterest in the stock market, thus not allowing any distractions to get in the way of the growth of their holdings.
But those that do become interested in the market, through the Motley Fool introduction perhaps, may decide to look a little further than LTB&H, fine though I believe that strategy to be. Hence, as can be seen by looking at our various boards, we offer discussion areas on a large range of approaches to share investing, of which value is one.
Strategies are there for two main reasons. Firstly, to try and improve on the sort of general market performance offered by tracker funds and general LTB&H approaches. Secondly, to make the whole process more fun by doing something interesting rather than boring. If you can make money and have pleasure doing it, then you have the best of both worlds.
I advise new investors, once they have learned the basics of share valuation and so on, to consider their psychological financial profile before they embark on a particular strategy. You have to be adapted for your approach. Going into something for which you do not possess, or are unable to acquire, the necessary mindset is going to increase the chances of failure.
Thus someone who lacks patience, or cannot learn it, may not be suited to LTB&H for example because they would forever be dumping a share through every bad patch. LTB&H requires a totally relaxed view of things. Equally at the other end, someone who lacks trader instincts, who is unable to smell a good deal or stick to a system – which is most people – is unlikely to be consistently good at daytrading.
So Is Value Foolish? The answer has to be no, especially the way I play it. Value covers a range of approaches, under the general heading of cheap fundamentals. My particular style of holding only one or two shares would not be considered Foolish at all, but excessively risky. Investment textbooks will nearly all talk of eggs and baskets.
Another unFoolish aspect, common to most value players, is the holding period. We are interested in stripping out a shortish term price rise as the value outs, whether by a rise or a fall. Most of us are not interested in holding a share after it has lost value. You wouldn't be a real value player if you stuck with it after that. So commitment is out. After that we move on to the next one or go cash.
What of the feeling of owning part of a company? Thanks but no thanks. That suggests an involvement with – yuk! – people. I am interested in assets, money, numbers. I care not one jot for who works for the company, its management quality and all that kind of nebulous emotive stuff. Shares are poker chips, bits of paper.
When I have a share in a company I certainly do not feel part of it. That is the last thing I want, because it implies a love affair. I would fight any such feelings of love and long ago learned to defeat them. My value shares are mere whores, there to perform a job for me, not lovers. They care nothing for me, and I nothing for them. In fact having made a decision to go in, I am immediately looking for the exit, re-assessing constantly to see if it is time to go yet. I want to get out as soon as the share has done the business for me. I love going cash. It is the ultimate purpose of the whole value exercise. The share itself is just a means of achieving that. And my approach is a highly systematic method of doing it.
I was talking recently to a day or short-term trader who makes money overall and has done for some years. He said to me that he loses over forty percent of the time but he has a system to which he adheres absolutely because he knows it is a winning approach. I told him that I am a system player too. System players win. But that conversation brought home to me that maybe I've got more in common really with a skilled short-term trader than the average kind of share investor.
I like what I do. But I guess it is not Foolish. Not Basic Foolish anyway. Maybe it is Advanced Foolish. I'll let others judge, the label is not really important.
Where Next?
Is value investing Foolish? Have your say on the Value Shares board.
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